The Mining Tax: This week in the High Court of Australia

This week, commencing on Wednesday, 6 March 2013 the High Court will hear argument in Fortescue Metals Group Ltd v Commonwealth, the challenge by Andrew Forrest to the Commonwealth’s Mineral Resources Rent Tax, more common known as the Mining Tax.

The Fortescue Group raises four different grounds for challenging the Mining Tax:

First, it is a law with respect to taxation that discriminates between States contrary to section 51(ii) of the Constitution;

Second, it is a law or regulation of trade, commerce or revenue that gives preference to one State over another, contrary to section 99 of the Constitution;

Third, it is a law that contravenes the Melbourne Corporation doctrine in that it interferes with or curtails in a substantial manner the exercise by a State of its constitutional powers;

Fourth, to the extent the Mining Tax applies in respect of iron ore, it contravenes section 91 of the Constitution which preserves (it is said) the right of a State to provide aid to or a bounty on the mining or, inter alia, metals.

One feature of the Mining Tax as ultimately enacted is the way in which State mining royalties are treated for the purposes of determining the amount of Mining Tax payable.  The Mining Tax is payable on the miner’s “mining profit” after deducting from such mining profit the amount of the miner’s “MRRT allowances”.  The mining profit is, as might be expected, the difference between “mining revenue” and “mining expenditure”.  The “MRRT allowances” include State royalties.  In this way, in a State where the miner pays a higher royalty, the amount on which the Mining Tax is levied is correspondingly reduced and a lower amount of Mining Tax is payable.  Conversely, in a State with a lower royalty payable, a higher amount of Mining Tax is payable.

The arguments raised by Fortescue Metals Group that rely upon discrimination are based upon the proposition that a miner’s actual liability to pay the Mining Tax will vary from State to State, depending upon the royalty payable in each State.  However if this amounted to prohibited discrimination, then it would potentially have the effect that all income tax in its current form would be prohibited, because income for taxation purposes is ordinarily net of various imposts that vary from State to State (such as payroll tax and stamp duty).  This has never been thought to amount to discrimination.

The arguments based on section 91 of the Constitution (the bounties provision) are based on the proposition that a State cannot reduce or give a concession on the royalty rate payable by a miner in order to assist production, because any such reduction or concession will result in a corresponding increase in the Mining Tax, effectively neutralising the State assistance.  As discussed below, that is hardly a realistic concern given the current State royalty environment.  But more fundamentally, section 91 is a carve-out from the operation of other provisions of the Constitution that would prohibit the grant of aid and of bounties to assist mining activities (in particular section 90 - which prohibits the States from levying excise and providing bounties, and perhaps section 92 - which requires freedom of interstate trade and commerce), and does not seem to be a prohibition on the exercise of Commonwealth legislative power.

The arguments based the Melbourne Corporation doctrine are to some extent dependent upon the States’ effective inability to use royalty rates as the economic levers by which a State stimulates its economy and provides for the development of its mineral resources and, importantly, the associated infrastructure and facilities that benefit not only the miners but the State community as a whole. However, with very limited exceptions reduction in royalties seems to be a throwback to the past, as the States have (understandably, given the resources boom) been content to reap the benefits of their royalty regimes and have not regarded the miners as entities requiring assistance. The Melbourne Corporation arguments go further and suggest that historically, and Constitutionally, the States’ control and management of its waste lands (including the minerals therein) are inherent features of the very existence of the States, and the Mining Tax interferes with that control to such an extent as to be invalid.  If this sounds like “reserved powers redux”, that’s probably because it is.

In any event, the High Court has in recent times been highly unpredictable when it comes to what has hitherto been considered constitutional orthodoxy, particularly in the revenue and spending powers of the Commonwealth.  Only time will tell whether there is another rabbit in the hat.  In a case being argued by a Queenslander (David Jackson QC) before a bench led by a West Australian (Robert French) with a new intellectual powerhouse in its ranks, also from Queensland (Patrick Keane), it will be interesting to see how the cards ultimately fall.